Santander Securities, LLC, was censured, fined $2,000.000.00, and ordered to pay restitution of roughly $4,300,000.00 after consenting to Financial Industry Regulatory Authority (FINRA) findings that the firm had failed to have a reasonably designed supervisory system and set of procedures pertaining to sales of Puerto Rico Municipal Bonds to customers in Puerto Rico, and had supervisory failures pertaining to employee brokerage accounts. Letter of Acceptance, Waiver, and Consent, No. 201404135501 (Oct. 13, 2015).
According to the AWC, Santander’s supervisory systems and procedures did not require the firm to review or assess whether its proprietary product risk-classification tool took into account the unique and changed risks of investing in the Puerto Rico Municipal Bonds. The AWC indicated that Santander had inadequate systems and procedures in place to monitor the appropriate use of margin concerning the purchase of the Puerto Rico Municipal Bonds or to monitor for over-concentrated positions in such bonds as well as Puerto Rico Closed-End Funds – despite the fact that the firm had certain reports designed to identify concentration levels and margin activity in the firm’s customer accounts.
The AWC stated that the Puerto Rico Municipal Bonds were a preferred investment for Puerto Rico residents considering their attractive tax status and returns. Santander reportedly solicited Puerto Rico customers to purchase roughly $180,000,000.00 in the Puerto Rico Municipal Bonds and over $101,000,000.00 in the closed end funds.
Problems arose in November 29, 2012, when Santander reduced its Puerto Rico Municipal Bond inventory amid downgrades from Moody’s of Puerto Rico’s General Obligation bonds and related debt to Baa3, a rating which was one step above junk-bond status. Given such downgrades and customers’ high concentration of the bonds, according to the AWC, FINRA found that the firm should have reviewed its risk-classification tool, Securities Master, to assess whether to modify risk classifications of the Puerto Rico Municipal Bonds.
FINRA found that Santander’s deficient supervisory procedures pertaining to Securities Master did not require an assessment of the Securities Master in order to ensure the guidance it provided accurately reflected market risks of investing in the Puerto Rico Municipal Bonds. FINRA found this deficiency to be violative of MSRB Rule G-27 – a rule which requires brokers, dealers, and municipal securities dealers to supervise the municipal securities activities to ensure compliance with the MSRB rules, federal securities laws, and requirements for adequate supervisory systems.
FINRA also found that with Santander’s supervisory failures concerning supervision of margin activity in Puerto Rico Municipal Bonds and concentration levels of the PR investment accounts, Santander had violated NASD Conduct Rule 3010(a) and 3010(b), FINRA Rule 2010, and MSRB Rule G-27.
Further, Santander was found to have failed to establish a supervisory system and procedures for identifying and reviewing transactions in employee and employee-related accounts so as to identify possible conflicts of interest. Consequently, according to the AWC, from October, 2010 – April, 2014, roughly forty-one percent of employee and employee-related transactions were effected without the firm’s approval. FINRA found that certain customers’ whose Stockbrokers engaged in contra-transactions (employees selling securities directly from their accounts to customer accounts or buying directly from customers) suffered harm and losses – prompting FINRA’s call for restitution. FINRA found Santander’s conduct in this regard to be in violation of NASD Conduct Rules 3010(a) and 3010(b), FINRA Rule 2010, and MSRB Rule G-27.
FINRA, via NASD Rule 3010(a), requires that firms and supervisory personnel establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable securities laws and regulations. Additionally, Rule 3010(b) requires that firms establish, maintain and enforce written procedures to supervise their business and Stockbrokers that are reasonably designed to achieve compliance with applicable securities laws.
This is not the first time that Santander has been subject to discipline for supervisory mishaps. In April, 2011, FINRA hit Santander with a $2,000,000.00 fine after the firm consented to FINRA’s findings that the firm had deficiencies in structured-products business from September, 2007 – September, 2008 – which included unsuitable sales of reverse-convertible securities to retail customers in Puerto Rico and inadequate supervision of sales of structured products and accounts that were funded with loans from the firm’s affiliated bank. The AWC indicated that the firm had reimbursed customers for more than $7,000,000.00 as a result of losses resulting from purchases of reverse-convertibles.
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esquire, and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.